sign up log in
Want to go ad-free? Find out how, here.

Market takes some comfort from latest US CPI report. USD and US 10-year yield fall, the latter aided by strong bond auction. NZD outperforms, up as high as 0.7060

Currencies
Market takes some comfort from latest US CPI report. USD and US 10-year yield fall, the latter aided by strong bond auction. NZD outperforms, up as high as 0.7060

For a change, the US CPI report didn’t throw up any nasty surprises, seeing US Treasury yields push lower and with a strong bond auction adding to the downside pressure. The data drove broad-based weakness in the USD and the NZD has been one of the best performers, rising 0.6% overnight to 0.7050.

After a string of massive increases, US CPI inflation moderated in July, largely as expected, and a touch weaker at the core level, up 0.3% m/m and 4.3% y/y. This reflected much weaker price pressure in some of the “re-opening” components such as used cars, car rentals and airline fares, while food and energy components showed rising price pressure. At first glance, it supported the view that inflationary pressure is currently “transitory” although it is far too early to declare game over. This is just one month of data and, on the other side of the debate, core inflation of 0.33% per month (on unrounded figures) is still annualised inflation of over 4% if this rate is sustained, far too high for comfort.

The market took some solace in the data and the immediate market reaction was a fall in the USD and a 3bps fall in the US 10-year rate from a high of 1.37%. Following that, strong bidding was evident at the 10-year Treasury auction, with the cleared rate some 3bps below the prevailing level and indirect bidders (a proxy for foreign demand) at a record high 77.2% for the tenor, sending primary dealers scrambling for stock and driving yields down to as low as 1.30%. The market has since calmed down, currently 1.33%, down about 3bps from the NZ close.

There has been plenty of Fed-speak overnight, but none from the heavy hitters. Kansas City Fed President George, who sits on the hawkish side of the spectrum, argued for reducing policy stimulus, saying “today’s tight economy…certainly does not call for a tight monetary policy, but it does signal that the time has come to dial back the settings”. Dallas Fed President Kaplan, who is also considered a hawk, said that he favours a plan for tapering bond purchases to be announced at the September FOMC meeting, and beginning tapering in October. The Fed’s Barkin took a more centrist view, saying “we will get there in the next few months” in terms of meeting the condition for tapering bond purchases. Evans is aligned with that view, suggesting that he wasn’t ready to support a tapering decision next month and he’d like to see a few more employment reports.

The next two key events for the bond market to focus on will be Fed Chair Powell’s keynote speech at the Jackson Hole symposium later this month and the next payrolls report early September.

The USD weakened immediately after the CPI report and pushed down further after the Treasury auction. Movements haven’t been particularly large though, with the BBDXY index down 0.2% for the day. Overnight gains for the JPY, EUR, CAD and GBP have been in the order of 0.2-0.3%. Both the NZD and AUD have outperformed with larger gains.

The NZD saw another weak local trading session but the broadly based fall in the USD has seen it trade up to a high of 0.7060 and it currently sits around 0.7045. The AUD met some resistance just below 0.7390. NZD crosses are all moderately higher. NZD/EUR broke up through 0.6000 to reach a three-month high.

In other news, China credit growth was much weaker than expected in June, running at its slowest pace in 17-months, a mixture of seasonal factors and some genuine slowdown in economic momentum. Earlier in the week, the PBoC reiterated that it would guide loans to grow “reasonably” and ensure the pace of credit expansion matches nominal economic growth. Unlike major developed central banks, the PBoC still has many levers it can draw on to ease monetary policy if desired.

The US Senate passed a $3.5 trillion budget framework, which incorporates a wide range of social policies. The odds of the package passing the House in its current form are small, with a number of Democrats opposed to many facets of the package and this is likely to be another drawn out process.  

Oil prices dipped after the White House called on OPEC to boost oil production, saying that the cartel’s planned supply increases would not fully offset previous production cuts. Brent crude fell by nearly $2 to just above USD69, but has since more than recovered, now up closer to USD71.50, up over 1% for the day.

Trading conditions in the domestic rates market remained quiet, ahead of next week’s RBNZ MPS. Rates were 2-3bps higher across the swap and NZGB curves, largely reflecting global forces from the previous overnight session and some lingering payside pressure at the short end of the curve.

In the day ahead, the RBNZ’s survey of expectations is expected to show rising inflation expectations, with the key 2-year ahead rate likely to push further into the top half of the 1-3% target range. Tonight, Q2 UK GDP data should be a stonker, with the consensus expecting growth of 4.8% q/q, a big rebound coming out of a period of harsh lockdowns. Other releases are second-tier but include euro area industrial production, US jobless claims and US PPIs.

Daily exchange rates

Select chart tabs

Daily benchmark rate
Source: RBNZ
Daily benchmark rate
Source: RBNZ
Daily benchmark rate
Source: RBNZ
Daily benchmark rate
Source: RBNZ
Daily benchmark rate
Source: RBNZ
Daily benchmark rate
Source: RBNZ
Daily benchmark rate
Source: RBNZ
End of day UTC
Source: CoinDesk

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.